Four Revenue Scores on Options to Change U.S. International Tax Rules

August 17, 2021

Correction (8/25/2021): Due to a minor error in our Multinational Tax Model, several of the calculations in the original version of this post were incorrect. That error has now been corrected and this analysis has been updated accordingly.

As lawmakers in Congress consider ways to change tax rules, a recent Tax Foundation study shows the effects of four options to overhaul the United States’ international tax regime. These options include changes to policies such as the corporate tax rate, Global Intangible Low-Taxed Income (GILTI), Foreign Derived Intangible Income (FDII), Qualified Business Asset Investment (QBAI), and other related issues.

The results focus on the change to federal corporate tax revenue from U.S. multinational companies, and do not include revenue from non-multinationals or derivative effects of increased corporate tax liabilities, such as reduced capital gains and dividends for the shareholders of multinationals.

The four proposals modeled are:

  1. the Biden administration’s proposal;
  2. a partial version of the Biden administration’s proposal;
  3. a revenue-neutral change to GILTI;
  4. an option that would align GILTI to the recent global minimum tax proposal (Pillar 2) that was outlined by the OECD at the beginning of July.

Effects of Four Options to Change U.S. International Corporate Tax Rules on Federal Corporate Income Tax Liabilities of U.S. MNEs  

Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Proposal 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
Option 1: Biden 108.8 117.2 126.6 135.0 128.3 132.5 136.4 140.0 143.6 147.6 1315.9
Option 2: Partial Biden 51.5 55.5 59.9 63.8 54.2 55.8 57.4 58.9 60.4 62.0 579.5
Option 3: GILTI Fix 8.2 6.6 6.0 5.8 -3.5 -3.9 -4.3 -4.7 -5.0 -5.2 0.0
Option 4: Pillar 2 16.4 15.2 15.3 15.6 6.7 7.5 7.4 7.3 7.2 7.3 106.0

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The Biden proposal would be the largest increase in tax liabilities for U.S. multinationals, at $1.32 trillion over 10 years. The partial Biden proposal raises less than half as much revenue, at $579.5 billion. The revenue-neutral option raises no net revenue over 10 years, and the Pillar 2 option would increase tax liabilities for U.S. multinationals by $106 billion.

The options are described in more detail below.

Option 1: Effects of Biden Administration Proposal on Federal CIT Liabilities of U.S. MNEs

Change in federal corporate income tax liabilities of U.S. MNE ($billions)
Provision 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
28% CIT rate 55.8 60.1 64.9 69.2 77.8 80.4 82.8 85.0 87.2 89.6 752.9
 + 21% GILTI rate 22.3 23.8 25.6 27.2 14.5 14.9 15.4 15.8 16.2 16.6 192.2
 + No QBAI exemption 11.5 12.3 13.2 14.1 14.8 15.2 15.7 16.1 16.5 16.9 146.4
 + Country-by-country GILTI 3.6 3.8 4.1 4.4 4.5 4.7 4.8 4.9 5.1 5.2 45.2
 + Repeal FDII 7.9 8.9 9.9 10.7 7.0 7.2 7.4 7.6 7.8 8.1 82.6
 + Sec. 265 application 7.7 8.2 8.8 9.4 9.7 10.0 10.3 10.6 10.9 11.1 96.7
Total 108.8 117.2 126.6 135.0 128.3 132.5 136.4 140.0 143.6 147.6 1315.9

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The first proposal modeled and analyzed is that of the Biden administration, using the details outlined in the Green Book. Over 10 years, the proposal from the Biden administration would raise the federal corporate tax liability of multinationals by $1.32 trillion, with the bulk of that coming from an increase in the corporate tax rate from 21 percent to 28 percent.

The changes included in this proposal are:

  • an increase in the corporate tax rate to 28 percent;
  • an increase in the GILTI inclusion rate to 75 percent (raising the GILTI minimum rate to 21 percent);
  • an elimination of the QBAI exemption on GILTI;
  • a shift to by-country calculation of GILTI foreign tax credits;
  • an elimination of the FDII deduction;
  • applying the section 265 denial of deductions to excluded GILTI income and exempt foreign dividends.

Each of the changes included in the Biden administration’s proposals would result in substantial increases in the tax liabilities of U.S. multinationals. The increased corporate tax rate would increase the tax liability of multinationals by a total of $752.9 billion over 10 years.

The 75 percent GILTI inclusion (and the resulting GILTI minimum rate of 21 percent) would result in $192.2 billion of additional tax liability over 10 years. Particularities in the current structure of GILTI—namely, a current law increase in the GILTI inclusion rate from 50 percent to 62.5 percent in 2026—mean that the effects are more pronounced in the first four years.

The elimination of the QBAI exemption, i.e., 10 percent of tangible assets, results in an additional $146.4 billion in corporate tax liability over 10 years. The transition to a jurisdictional approach to calculating GILTI foreign tax credits results in additional liabilities of $45.2 billion over 10 years, and the application of section 265 denial of deductions results in additional liabilities of $96.7 billion over the same window.

Option 2: Effects of Partial Biden Proposal on Federal CIT Liabilities of U.S. MNEs

Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Provision 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
25% CIT rate 32.0 34.5 37.3 39.7 44.6 46.1 47.5 48.7 50.0 51.3 431.7
 + Accelerate GILTI/FDII rate changes 12.2 13.2 14.3 15.2 0.3 0.2 0.2 0.2 0.1 0.1 56.0
 + Mandatory high-tax exemption at 22.5% 5.8 6.2 6.7 7.1 7.4 7.6 7.9 8.1 8.3 8.5 73.6
 + No GILTI QBAI exemption 1.4 1.5 1.6 1.8 1.8 1.9 1.9 2.0 2.0 2.1 18.1
Total 51.5 55.5 59.9 63.8 54.2 55.8 57.4 58.9 60.4 62.0 579.5

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The second option modeled adopts some of the measures set forth in the Biden administration’s proposal, while tempering or eliminating some of the features. This option incorporates features discussed in the framework released by Senators Ron Wyden (D-OR), Mark Warner (D-VA), and Sherrod Brown (D-OH)—including a mandatory high-tax exclusion on GILTI—and some elements of the Biden administration’s proposal.

The option would increase tax liabilities on multinationals by $579.5 billion over 10 years. The features tested in the model are:

  • an increase in the corporate tax rate to 25 percent;
  • early implementation of an increased GILTI inclusion rate of 62.5 percent;
  • early implementation of a lowered FDII deduction of 21.875 percent;
  • a high-tax exemption for income earned in jurisdictions with an effective tax rate above 22.5 percent;
  • elimination of the QBAI exemption.

Nearly $432 billion of the $580 billion, over 74 percent, in projected additional revenue from this proposal would come from the higher corporate tax rate. The early implementation of the increased GILTI and FDII inclusion rates would result in $56 billion in additional revenue, with most of that increase coming before 2026, when they were scheduled to take effect.

Further, a GILTI calculation that includes a mandatory high-tax exemption would increase liabilities by $73.6 billion, by reducing opportunities for pooling or blending foreign tax credits across jurisdictions.

Eliminating the QBAI exemption raises only $18.1 billion over 10 years under this option, far lower than the $146.4 billion increase from the same change under the Biden administration’s proposal. There are two reasons for this. First, the GILTI rate is lower (due to the lower inclusion and the lower corporate tax rate), which dampens the effect of a change to the GILTI base. Second, tangible assets are more often held in higher tax countries, and the mandatory high-tax exemption already excludes much of the income that would be captured by an elimination of the QBAI exemption.

Option 3: Effects of GILTI Fix on Federal CIT Liabilities of U.S. MNEs

Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Provision 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
Restore worldwide interest expense allocation -1.8 -1.9 -2.1 -2.2 -2.4 -2.4 -2.5 -2.6 -2.6 -2.7 -23.3
 + Allow GILTI FTC carryforwards 0.0 -2.0 -3.1 -3.9 -6.2 -6.1 -6.2 -6.4 -6.6 -6.9 -47.3
 + 14.1645% GILTI rate 10.0 10.5 11.2 11.9 5.0 4.6 4.4 4.3 4.3 4.4 70.5
Total 8.2 6.6 6.0 5.8 -3.5 -3.9 -4.3 -4.7 -5.0 -5.2 0.0

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The third option modeled is a revenue-neutral change that would fix some underlying problems with the functionality of GILTI. This option is, as one might expect, revenue-neutral over the 10-year window. The features included in this option are:

  • the restoration of worldwide interest expense allocation;
  • the allowance of GILTI foreign tax credit (FTC) carryforwards;
  • an increased GILTI rate of 14.1645 percent.

The proposal addresses concerns regarding interest expense allocation and FTC carryforwards. Worldwide interest expense allocation—where expenses are allocated to foreign entities based on a comparison of actual foreign expenses to the expected foreign expenses, rather than a formulaic allocation of only domestic expenses—was eliminated under the American Rescue Plan Act of 2021. Carryforwards of GILTI FTCs are not allowed under current rules, leading to volatility from year to year.

Restoring the option to allocate interest expense using a worldwide method would lower the tax liabilities of multinationals by $23.3 billion over 10 years. Allowing FTCs to be carried forward would decrease liabilities by $47.3 billion over 10 years. To make up for the lost revenue over the 10-year budget window, an increase in the GILTI minimum rate to 14.1645 percent would be required.

The additional revenue comes primarily in the first four years, while the effects of the tax cut from the FTC carryforwards are not fully felt until after that. This means the policy option would not be revenue-neutral beyond the 10-year window.

Option 4: Effects of Pillar 2 Compliance on Federal CIT Liabilities of U.S. MNEs

Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Provision 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
15% GILTI rate 12.4 13.2 14.2 15.1 6.8 7.0 7.2 7.4 7.6 7.8 98.8
 + Remove GILTI FTC haircut -2.8 -3.0 -3.2 -3.4 -3.6 -3.7 -3.8 -3.9 -4.0 -4.1 -35.7
 + Country-by-country GILTI 7.2 7.7 8.3 8.9 9.2 9.5 9.8 10.1 10.3 10.6 91.7
 + Allow GILTI FTC carryforwards 0.0 -2.4 -3.7 -4.7 -5.4 -6.0 -6.5 -6.9 -7.3 -7.7 -50.8
 + Use OECD QBAI/payroll exemptions -0.4 -0.3 -0.3 -0.3 -0.2 0.8 0.7 0.7 0.7 0.7 2.1
Total 16.4 15.2 15.3 15.6 6.7 7.5 7.4 7.3 7.2 7.3 106.0

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The final option modeled is an overhaul of GILTI to reflect the structure of the OECD Pillar 2 framework. The modeled changes would increase 10-year tax liabilities of U.S. multinational companies by $106 billion. This option includes:

  • a 15 percent minimum tax rate;
  • a country-by-country GILTI calculation;
  • GILTI FTC carryforwards;
  • a 7.5 percent (dropping to 5 percent after five years) tangible asset and payroll exemption in place of the 10 percent QBAI exemption;
  • removing the 20 percent haircut on foreign taxes paid on GILTI.

The increase in the GILTI rate to 15 percent would raise liabilities by $98.8 billion, but the elimination of the 20 percent FTC haircut would reduce liabilities by a total of $35.7 billion over 10 years. A shift to country-by-country GILTI calculations would raise over $91.7 billion in 10 years, but the allowance of carryforwards would reduce liabilities by $50.8 billion. Replacing the QBAI exemption with a tangible asset and payroll exemption would have a negligible impact on multinational firms’ tax liabilities.

Changes to international tax rules are likely on the way, according to a recent memo to Democratic senators, and it is therefore important for lawmakers to understand how various reform options would impact U.S. tax burdens on multinational companies. Moreover, policymakers should also recognize the need for prudent policies that do not put U.S.-based multinationals at a competitive disadvantage or severely curtail investment and hiring.

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Foreign Derived Intangible Income (FDII) is a special category of earnings that come from the sale of products related to intellectual property (IP). If a U.S. company holds IP in the U.S., such as patents or trademarks, and has sales to foreign customers based on that IP, the profits from those sales face a lower tax rate.

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A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.